Asset managers are warning that liquidity in the European corporate bond market is drying up as a result of regulatory and commercial pressures on banks, mimicking some of the conditions that presaged the credit crunch.

Tanguy Le Saout, head of European fixed income at Pioneer Investments, said liquidity in the secondary market for European corporate bonds “is going down and down and down”. Le Saout said he expected European corporate debt prices to rise next year. However, reduced liquidity is increasing the risk that a market downturn could turn into a rout. He said big outflows from funds would be a problem. He added: “Some may have to close funds to stop outflows, just like BNP Paribas had to in August 2007. The risk of that happening is going up.”

On August 9, 2007, BNP Paribas stopped withdrawals from three investment funds it could no longer value, citing “the complete evaporation of liquidity in certain market segments”, heralding the start of the financial crisis.

Michael Eberhardt, a vice-president in the managed investments group at rating agency Moody’s, said no figures were available on liquidity, but that “there is a decline in the sellside inventory of corporate bonds, which would result in a decline in liquidity to buyside managers”.

In October, the Federal Reserve Bank of New York published data showing the average corporate bond inventory among US primary dealers had fallen by 43% in the two years to the end of September.

Chris Iggo, chief investment officer for fixed income at Axa Investment Managers, said that although he was not anticipating a bond sell-off, “any correction is likely to be amplified by the lower level of liquidity in bond markets – which is worse the lower down the credit spectrum you go”.

Alexandre Tavazzi, head of advisory at asset manager Pictet, said: “Bond markets are less liquid than you might think. We halved our recommended weighting in investment grade corporate bonds to 10% earlier this year.”

April LaRusse, senior product specialist for fixed income at Insight Investment, said banks’ appetite for marketmaking was less now than before 2008, and some banks would not trade certain instruments. She said: “We can find liquidity where we need it in the securities we trade. But we have to change positions earlier than we would have before. We might decide to start buying a sector early in order to reach a certain allocation. Or, if something looks expensive, we take profits earlier than we would have when liquidity was greater.”

A hedge fund manager said: “The European market is increasingly shifting away from investors with a longer-term investment horizon, such as banks, to investors with a shorter-term horizon. Combine this with a reduction in liquidity provision by investment banks and brokers, and you have a potentially dangerous cocktail.”

Franck Dixmier, chief investment officer for fixed income in Europe at Allianz Global Investors, said: “In the eurozone, more complexity and fragmentation of the market reduces liquidity.”